The reporter visited several McDonalds outlets in Wuhan, China and found that the prices of many items had been increased by 10-to-20 percent. According to industry people, customers stopped buying from the main chicken supplier (implicated in the pharmaceutical scandal). This limited the supply of the "white feather" chicken used by McDonalds, raising the price of chicken about 20 percent. McDonalds says the prices were raised due to higher operating expenses and labor costs.

Some local people say this incident will chisel away market share from McDonalds and KFC. The reporter claimed to see few customers in McDonalds restaurants visited around noon time, because of "chicken phobia." A student interviewed by the reporter said, "Even if they claim to have inspections, there is still a shadow of doubt."

A local fast food operator sees an opportunity in the crisis. He says that there is really not that much difference between the local and foreign restaurant chains despite the foreigners' image of strict standards. He says the local chains have a lower cost structure since they buy from local chicken suppliers and pay lower rent by putting outlets in residential areas, bus stations, and near schools instead of expensive shopping malls. He says his chain plans to open a lot of stores this year to increase market share.

A Wuhan business professor says local fast food has been growing rapidly since 2011 and there is a shift away from the foreign chains. He says that the foreign chains were viewed as mid- or high-end eateries when they first arrived in China and now they have a relatively high cost structure due to their high rents and operation costs. This puts pressure on their profit margins.

Wednesday, January 30, 2013

Last week, the China Women's Newswarned readers about the serious threat of pollution from livestock, a far greater source of pollution than industry. The article reported that the latest data (2010) from Ministry of Environmental Protection surveys showed that livestock was the largest source of chemical oxygen demand (COD, a measure of water pollution), accounting for 45 percent of the total, and it also accounted for 25 percent of ammonia emissions. The COD from livestock was reportedly over 4 times industrial COD and ammonia emissions were 3 times industrial emissions. If you'd like examples of the impacts of livestock pollution, click on the "pollution" tag at the bottom of this post.

With rising living standards and a big boost from government officials since the 1980s, China's livestock industry grew to become the world's biggest. Until the 1970s, China's livestock were relatively few in number and they were scattered over the countryside. Manure was actually the main product of pigs--used for fertilizer--the meat and bristles were secondary products. However, in the 1980s Chinese officials came up with a "modernization" strategy for livestock. Animals are now raised in concentrated numbers in large farms or specialized villages and there is far too much waste produced to use as fertilizer.

According to China's first census of pollution sources released in 2009, livestock produced 243 million metric tons of manure and 163 million metric tons of urine, little of it treated. That year China reported producing 69 mmt of meat, so that's 4.4 tons of waste per ton of meat. These numbers are much lower than others reported in Chinese journals and seem low.

The Women's News article cites the example of Changde Prefecture in Hunan Province which produces 19 billion yuan of livestock products annually as well as 1 million tonnes of waste, of which 60 percent is untreated and contaminates the water, air and soil. News media in Taoyuan County reported that the air was filled with a pungent stench and streams had turned black, polluting the water supply for a million people downstream.

In August 2012, news media in Henan reported that pig farms around a reservoir had fouled the water so that the bottom was no longer visible. Local villagers complained that they couldn't wash their clothes in the water. Those who swam or bathed in the water got painful itching on their skin.

The article warns that livestock pollution is a important reason for declining water quality. Livestock manure contains large amounts of nitrogen and phosphorus nutrients, which causes excessive growth of organisms when it enters bodies of water, leading to eutrophication.

Livestock waste also contaminates soil and the crops grown in it. In many regions animal numbers exceed the soil's ability to absorb the nutrients from manure. Waste also contains feed additives not absorbed by the animals: antibiotics, hormones, and metals like copper, lead, iron, chromium, arsenic and zinc that accumulate in the soil and may be absorbed by plants.

A 2009 article posted on the Peoples Daily site explained why so many heavy metals are added to pig feed. Copper sulfate is popular because it enhances the absorption of nutrients by pig intestines, increasing feed efficiency. A professor quoted in the article said that farmers often add copper to prevent piglets from getting diarrhea (a common malady on Chinese farms). Chinese feed mills often add arsenic to feed because it turns their skin red and makes their fur shiny, giving them a vigorous appearance. Feed mills feel they have to add metals to make their feed competitive. One feed miller quoted in the article said, "The problem of excessive heavy metal in feed is much worse than 'lean meat powder' (clenbuterol)." Heavy metals can enter the human body either by consuming its residue in animal products or from crops grown in the soil around the farms. The professor estimated that 90 percent of the copper sulfate exited the pig's body in its manure--turning it black. The accumulation of heavy metals causes "dead soil" around pig farms.

The Women's News article also warns that livestock can spread disease when raised near humans. Manure contains microorganisms, can encourage mosquitoes, and can affect sanitation in villages. It is said that slaughtering 100,000 head (of pigs?) pollutes the land in a 4.5-to-5-kilometer radius. Microorganisms can spread foot and mouth disease, respiratory disease, e-coli, anthrax, brucellosis, and fungal spores.

On January 5, the Ministries of Environmental Protection and Agriculture issued a plan to control livestock pollution during the 12th five-year plan (2011-15). Some provinces and localities have strict requirements on where livestock farms can be sited--including minimum distances from residential communities, highways and slaughter facilities, good ventilation, drainage, etc. Farms are encouraged to buy expensive equipment to treat waste and to balance livestock farms with crops or fish that can use the waste as feed.

If such regulations are followed, they will drastically reduce the number of sites where farms can be located and raise costs. This will put a lid on the growth in China's livestock production and probably reduce it. China may have reached "peak meat" as it begins to internalize environmental costs and monetize the costs of rural land and labor.

Tuesday, January 29, 2013

Chinese officials are quite pleased with their policy of steadily raising minimum prices for grains each year. However, there are subtle signs that the minimum price policy is actually re-creating the same problems that plagued the grain marketing system during the 1990s--the "hard to sell" phenomenon is back and farmers are getting paid with IOUs.

"Greetings, honored leaders and to everyone who can see my post! I am a farmer in [a town in] Jilin Province and my family planted about 10 shang of paddy rice this year. I have had many years of tough experience as a farmer, sweating every day. It’s not easy to make it to the harvest in the fall and now...I can’t get a single grain [of my rice harvest] from under the snow. No one will buy my rice since the moisture is so high. This is unimaginable!"

"...My town’s grain depot has still not started buying [rice]... The price we were offered [by traders] was low enough to kill us, not enough to cover costs. We have to pass the holiday with no money from our grain...We’re afraid the rice will get moldy when the weather turns warm after half a year--100,000 jin! Then how will we live? My wife is eight months pregnant!"

"How will I get money to buy milk for my child? We need money for fertilizer, seed, and pesticide--what will we do! Each leader should think of a solution each time he eats a meal. This looks like a small matter to the leaders, but it’s the lifeblood of us peasants! ...How could a small farmer bother you! But I still need to say I hope leaders will see we farmers really do not have it easy! Can any leaders help farmers?"

One article says, "The 'hard to sell' problem has reappeared in some grain-producing provinces. It's a little more widespread and a little more serious this year." It says that in some places the abundant harvest produced a "vicious circle" of "hard to sell" problems.

On January 23, an Economy Times reporter wrote about his investigation of the failure of the minimum price policy to help rice farmers in Anhui Province, asserting that the big harvest had not enriched farmers. He found that there are only a few scattered grain depots and many of them were not buying rice at the minimum price, either because they hadn't gotten funds or they had already filled their warehouse. Many farmers sold their rice to small traders at a low price--some not even receiving an IOU, while others just kept their rice on-farm.

In Hujiang County, the reporter found there were 14 grain depots, but only 2 were qualified to buy rice under the minimum price policy. Most farmers would have to haul their rice to a far-away township to sell at the minimum price. The reporter accuses the local Sinograin company of having little interest in carrying out the minimum purchase program. One warehouse had already been buying rice before the minimum price program for late rice began in November and they had no storage space left. The rice-purchase program was scheduled to last from November 26 to December 31, but rain and snow during that period made it difficult to sell grain.

Many grain stations in Anhui reportedly refused to buy grain that didn't meet the standard for the program or they downgraded it, which meant the price was lower. Local people say that a fifth of grain fails to meet the grade in a normal year, and the proportion rises to a third in bad years. The quality of the 2012 crop was not so good. One farmer said she had just sold 4,500 kg of rice to a small trader for a low price so she could get something for it. She thinks the trader is clever enough to resell it at a higher grade and make money on it.

Funds are delayed in arriving for payment to farmers. There are numerous steps and approvals needed in the hierarchy of grain companies and the Agricultural Development Bank. Some depots delay loans to save money on interest. Farmers get IOUs when the money doesn't arrive on time.

Officials in production areas complain that they serve as warehouses for cities. When the demand is strong and the price is good, traders come to Anhui from Zhejiang and Jiangsu Provinces to buy most of the grain. In some years they don't come, and it has to be stockpiled in the producing area. In this instance the local government has to bear a lot of the financial burden of holding the grain.

The Economy Times reporter concludes that the program intended to benefit farmers actually benefits traders.

Probably as a rebuttal to these concerns, the head of the Grain Bureau issued a statement highlighting that nearly 37.5 mmt of grain had been procured in 2012 for policy purposes. That was 11.9 percent of the grain procured by all enterprises.

Clearly, a price support program is much more difficult to implement than it is to describe it in an economics textbook. The interesting thing is that the phenomena of depots refusing to buy grain, downgrading grain, and issuing IOUs is exactly what happened in the 1990s when the government first tried to subsidize grain by instituting "protection prices". The government ended up banning private grain trade to prevent them from undermining the system. Grain depots were not inclined to buy grain at premium prices that would be impossible to resell profitably while private competitors bought it at a lower price and made quick profits.

The same thing is happening now and it will become more prevalent as the government continues trying to artificially raise the price. As is the case with many market-distorting policies they fail to accomplish their stated purpose and help only those who are clever enough to game the system.

Last week a task force from the Ministry of Agriculture's economic and market information office offered some policy suggestions to deal with some grim problems that have popped up in China's agricultural sector.

The task force identified a problem with "upside down" domestic and international prices for cotton, sugar, and dairy sectors. "Upside down" apparently means that Chinese prices are far above international prices.

The task force described the cotton and sugar markets as clearly "distorted" because Chinese prices are higher than international prices. They implicitly place the blame on international prices for being too low rather than blaming their price support for keeping Chinese prices artificially high. The task force says that imports are "pressuring" the domestic market and preventing authorities from selling reserves at a favorable price.

The task force offers vague suggestions: that China continue its cotton and sugar reserve stockpiling program and "explore" a new intervention system. The one clue offered is a suggestion to consider letting the reserve price gradually move toward the international price--that's a reversal from last year when they raised the support price for cotton when it was already clearly out of line with international prices. They also suggest increasing subsidies to cotton and sugar farmers to prevent their net returns from falling. This would be hard to do without breaking their WTO commitments. A "decoupled" subsidy would be impossible to do since there are no records of historical cotton or sugar acreage/production.

The task force describes the dairy situation as "grim" and recommends implementing controls on imports and enacting "special safeguards" and "technical barriers to trade" to take pressure off the domestic industry. Profits in dairy farming are declining. They report that average net return per cow was just 1000 yuan ($160), and many farmers in Heilongjiang and Inner Mongolia have been killing off dairy cows and replacement heifers, creating an "irrational" structure in the dairy herd. The task force worries that large numbers of small farmers may quit, threatening "industry security" and posing a risk of market instability. The recent revelation that New Zealand milk was contaminated with a fertilizer additive is very conveniently-timed given the recommendation of imposing "technical barriers". (New Zealand is the leading exporter of dairy products to China).

The task force also worries about the declining returns to planting grain and calls for a large increase in the minimum purchase price for rice. (An increase in the 2013 minimum price for wheat has already been announced.) Wheat returns were down last year for the fourth year in a row. A 10-province survey by the MOA found that net returns to wheat production were 152 yuan per mu (about $60 per acre), down 4 yuan from last year. The task force says that last year's corn was affected by pests and typhoons and production costs increased quite a bit. The good news for corn growers was a substantial increase in the corn price. In Jiangxi fees for production services to rice growers went up 20 percent. In Heilongjiang the rice harvest was disrupted by heavy rains, costs were up, and the price was about the same as the previous year.

The task force urges policymakers to firm up farmers' enthusiasm to produce by continuing market intervention in grain markets, watching out for the "hard to sell" phenomenon, and raising the minimum price for rice.

The final concern expressed by the task force is the wild up-and-down fluctuations in vegetable and fruit price due to imperfections in the marketing system. Prices of cabbage and radishes fell dramatically in the fall when these winter vegetables came on the market all at once and no one wanted to store them. The task force worries that there will be a "cabbage famine" after the peak consumption season at the spring festival (and presumably cabbage prices will soar again). Prices also plunged for some southern vegetables like cauliflower in Yunnan and peppers in Hainan. Prices fluctuated for tangerines and other fruit as well. The task force recommends forming better links between producing and consuming regions, building a set of "national-level" production bases and key farms, and setting up a directory system (perhaps so buyers and producers can find each other).

Surprisingly, there is no mention of soybeans or rapeseed, two sectors that have serious problems. No mention of soaring mutton and beef prices. Pork had a relatively stable year in 2012, so no mention.

As China raises minimum prices the "upside down" price phenomenon will spread to more commodities, especially if the U.S. drought ends and production grain and soybeans bounces back. Look for agricultural support to balloon and watch for a move away from "decoupled" subsidies to bigger payments with stronger incentives and new forms of market intervention like target prices. There may be more games with value added taxes, safeguards and more creative measures to slow down imports to cope with "upside down" prices.

This is an initiative to bring more efficiency to Chinese grain marketing. Currently, most Chinese grain is shoveled into bags, stacked on trucks, moved to trains or boats, etc., before reaching its final destination. Filling and emptying bags, stacking and unstacking them involves high costs and waste at each stage of the supply chain. The Chinese government has launched a "four bulks" program to promote a shift from bags to bulk-handling and transportation of grain as a "modernization" of Chinese logistics. Greater efficiency and reduced waste in grain handling and transport is badly needed as inter-regional grain shipments become more important.

The pilot program is in the northeastern region--which is the only major source of surplus corn to supply feed mills across the country. The program was announced last year by the National Development and Reform Commission's Railway Department, the Ministry of Finance and the National Grain Bureau. The first shipment took place on January 21 and took 82 hours to transport corn from Songyuan in Jilin Province to Yueyang in Hunan. China Grain Logistics Group handled the shipment. (Google maps says the distance is 2432 km and the trip would take 26 hours by automobile, but that's probably optimistic given Chinese traffic conditions.)

The government departments intend to subsidize construction of warehouses, strengthen "organization" of rail transportation, and foster a group of grain logistics companies to facilitate the transportation of grain out of the northeastern provinces to the rest of the country.

Monday, January 28, 2013

China has long been able to count on farmers to churn out cheap food, allowing city consumers to spend their discretionary income on cell phones, hair-dos, trips to the cinema, etc. However, the days of cheap food in China are coming to an end now that farmers have lucrative alternatives to the age-old cycle of planting and harvesting crops.

At one snack shop, the reporter found that the price for four fried bread sticks had been raised from 2.5 yuan to 3 yuan. The price is still equal to less than 50 cents in U.S. dollars, but the price boost represents a 20 percent increase. When asked about the price increase, the proprietor replied explained that his cost for a bag of flour had gone up from 80 yuan to 90 yuan.

In another shop, the boss said he plans to raise the price of 8 steamed pork buns from 5 yuan to 6 yuan after the spring festival--another 20-percent increase. In a shopping mall the reporter found that the price of fancy bread had been raised from 7 yuan to 8 yuan. In a French-style bakery, the price of a large cake was raised by 5 yuan and small ones were raised 1-to-2 yuan.

According to the manager of a Shanghai flour company consulted by the reporter, the increase in flour price is due to the increased price of wheat. In 2012 the government set the minimum price at 1.02 yuan/500g.

In Hangzhou, not far from Shanghai, the government has been selling wheat reserves into the market to cool off the "bull market" that has prevailed over the past four months. The price of flour is reported to be a little more than 15 percent higher than a year ago. In Jiangsu, it is also reported that rising flour prices have been stabilized.

In Shenyang, a northeastern city, it is also reported that flour prices have been rising for several months. A reporter found last Friday that prices for flour had gone up about 2 percent since Monday. In the supermarket he found that a 5-kg bag was 47 yuan (about $7.50 for 11 lbs), up 2 yuan from a year ago--a 5-percent increase.

A person from Shenyang's Price Bureau attributes the increase in flour price to peak demand ahead of the spring festival holiday and to the government's increase in the minimum wheat price for 2013. In other words, the government's announcement of a higher price for the wheat crop that will be harvested next June is increasing flour prices in January.

It's easy to see why an announcement of a future price increase affects today's price. If you have a few thousand tons of wheat in a warehouse and you know that the price will go up 10 percent next June, you will hold on to the wheat with the prospect of a guaranteed 10 percent profit. In fact, you will go out and try to get even more wheat, but everyone else knows the price is going up so they will be trying to buy too. Anyone holding wheat will demand a 10-percent higher price from potential buyers. Maybe the efficient markets hypothesis works after all.

Experts in the industry consulted by the Shenyang reporter expect flour prices to stay high. They say farmers have sold most of their wheat and the market supply is tight. When students and migrants go home for the holiday in early February flour demand will be robust, keeping prices high. The article notes that prices of rice, eggs, sugar could also go up. Prices of steamed bread, fried dough sticks, and pork buns at breakfast stands could rise.

An article from Qingdao in Shandong Province, "Will Flour Prices Increase Before the Holiday?" notes that wheat prices have risen from 2060 yuan/metric ton last August to 2640 yuan now, but flour millers have been trying to add to their wheat inventories. It says wheat supplies have been tight since the end of minimum price procurement in August. The article provides several reasons for rising prices. First, while Shandong had a good wheat harvest last year, Anhui had heavy rains around harvest that seriously affected the quality of wheat. Consequently, more buyers came to compete for the wheat that was available. Second, many feed mills have been using wheat as a substitute for corn, so flour mills have to compete with feed mills for wheat. Third, many farmers are unhappy with prices that fail to give them a reasonable profit, so they are holding their wheat off the market.

Monday, January 21, 2013

The founding of the China Apple Industry Association was celebrated in Beijing on January 8. This boring and seemingly innocuous news item and others from Shanxi and Gansu Provinces illustrate the government-industry partnership and technology-import strategies that are behind the Chinese "socialist market economy" growth model.

China produces half of the world's apples, has accounted for all recent growth in world apple output, and its apple juice concentrate industry dominates the world market. The apple industry association was set up to facilitate the transformation from a big producer of apples to a strong apple industry. Re-molding a nation of subsistence farmers into an "industry" entails moving from localized varieties, entrenched habits and minimum investment to planting standardized improved varieties, profit maximization and investment in fixed assets. In turn, this implies moving from a web of farmers to an "industry chain" that includes downstream traders, processors and marketing.

The apple industry association looks a lot like American industry associations which are also a government-industry partnership. There's a good reason for that: Chinese industry associations were inspired by American models. In particular, Chinese officials see the U.S. soybean industry association as particularly effective in promoting soybean exports to China. A Chinese soybean association was set up several years ago.

The Chinese apple industry association's stated purpose is to "elevate fruit farmers, serve as a bridge between government and companies and link the domestic industry with the world." Let's pick this apart.

The industry-government bridge is at the core of the association's purpose. While American associations reflect a similar industry-government partnership, the government plays the dominant role in the Chinese association. The apple association's chairman is a Ministry of Agriculture (MOA) official and the honorary head is the vice minister. Another MOA official is the association's communist party secretary. Provincial agriculture department officials from Shanxi and Gansu are vice-chairmen. The first role of the association is to "aid the government in implementing industry development plans."

In China, industry--even when privately owned--depends on government connections to succeed. Many of the functions to be carried out by the association are "public goods"--collecting and publishing market information, forming and disseminating standards and technology--but government dominance of these activities makes it necessary to have good government connections for a company to succeed. Nearly all agricultural research in China is conducted by government institutes and universities, and companies need connections to these institutions or the officials that oversee them in order to get access to improved cultivars, organic and other techniques, related certifications, processing technologies, and experts who put on training programs for farmers. Officials also can introduce companies to customers, ease customs inspections, waive fees or taxes, and send people on overseas trips.

The goal of linking the Chinese industry with the world is reflected by the central role of the MOA's foreign economic cooperation office. This suggests the association is part of the "going out" strategy that encourages Chinese companies to market products overseas and make strategic alliances that give China access to foreign advanced technology. The association's duties include choosing members for participation in domestic and overseas trade shows, establishing good relationships with foreign governments, technology organizations, and associations; organize overseas study tours for members. The association will promote "bringing in" (of technology) and push "going out." Chinese agricultural officials and companies focus on short-cuts and short-term profits from importing foreign technology instead of engaging in real innovation that is risky and requires long-term investment.

This is an industry association, not a farmers association. In China, "farmer" is still synonymous with "peasant," and farmers are viewed as helpless peasants who need to be "pulled along" (带动) by companies and government working hand in hand. The vice minister's speech urged the industry to unite (团结) and lead/guide (带领) the association's whole membership.

Farmer associations or cooperatives are kept intentionally small and localized with usually just a few hundred members in a few villages. Tight control of farmer associations reflects China's history of rural uprisings and the complicated history of farmer associations in China. (T.H. Shen's book Agricultural Resources of China described 1940s-era farmer associations as tools of political parties that did little or nothing for farmers' welfare.) Careful reading of today's Chinese government strategy for cooperatives shows that they view cooperatives as a network for administering the countryside and providing services the government can't deliver to the far-flung villages.

Some farmer cooperatives are members of the apple association, but in many of these "cooperatives" farmers have only a peripheral role. Most are dominated by a few leaders/stockholders. China has some bona fide cooperatives, but most cooperatives are formed by local party officials to fulfill a quota, shell cooperatives set up to get government subsidies, set up by a company to organize its raw material suppliers, or set up by extension stations to disseminate their fruit or vegetable cultivars.

Like companies, farmer cooperatives generally need the government's help to gain access to loans, academic and technical institutions, and marketing channels. A Gansu cooperative featured as a member of the new association was set up as a model cooperative with substantial government support. The cooperative sells its products to outlets in Beijing, Tianjin, Hohhot through the "farmer-supermarket" direct purchase program, a feat that could not be achieved without substantial government aid.

Another plum available from the government is status as a "model" (示范) county or village which comes with earmarked loans, hook-ups with companies, and other largesse. Tianshui City's (Gansu Province) commerce bureau reports that the region's apple industry has been selected as one of the second batch of upgraded foreign trade bases. Apple growers in Tianshui supply three companies that exported $36 million of apple juice concentrate in 2011. One company is a national-level "dragon head enterprise" and two are provincial-level dragon heads.

The apple industry illustrates China's a two-tiered "socialist market economy." A lower tier is comprised of millions of microenterprises--farmers, traders, workshops and vendors--pursuing profit in a laissez faire manner but mostly treading water. Everyone aspires to the upper tier--big companies that have world-class facilities, technology and access to high-end markets--but to access that tier you need a big company with good government connections. Agriculture itself has two tiers composed of "model" villages/counties and vast numbers of individual farmers. The "models" perform OK as long as resources are poured in, but they come to a screeching halt when officials lose interest. The broad population of farmers lack access to resources that support the "models."

Chinese development strategies are focused on fostering the upper tier while the lower tier treads water. This strategy can achieve big results in a short amount of time with tight control, but it keeps economic actors focused on cultivating government ties instead of pursuing innovation.

Perhaps the similarity of the Chinese industry-government partnership to American agricultural industry associations merits reflection on how the U.S. growth model has evolved. Is the U.S. economic model all that different from China's "socialist market economy"?

Monday, January 14, 2013

Chinese customs statistics report that soybean imports totaled 58.38 million metric tons during calendar year 2012. That was up 11.2 percent from 2011 and a new record. The average unit value was $599 per metric ton, up 5.8 percent.

Domestic Chinese soybean production continues to fall. A Ministry of Agriculture researcher says that area planted in soybeans fell from 60 million mu (4 million hectares) in 2009 to 40 million mu (2.67 million hectares) because net returns from soybeans are not as good as those for corn and rice.

An Academy of Social Sciences researcher frets that the imports are a "hidden danger" to food security. However, the article also reports that China would need 400 million mu (26.7 million hectares) of land to produce 58 million metric tons of imported soybeans at home.

The MOA researcher reports that the cost of domestic soybeans is 70-to-80 yuan higher than imported soybeans. Not only that, but importers can get a letter of credit that gives them cash they can use to import the beans and lend out to others for 3-to-6-months, whereas domestic beans are bought and sold on a cash basis.

Why are domestic soybeans expensive? One reason is China's price support program, formally known as a "temporary reserve." The government sets a minimum price for domestic soybeans that makes them more expensive than imports.

A target price policy is regularly being mentioned in Chinese news media as a better alternative policy. This would set a target price based on the cost of production plus a "reasonable" profit. If the market price is less than the target price, the government would farmers a subsidy equal to the difference between the target and the market price when they sell soybeans. Processors could buy domestic soybeans more cheaply and farmers would get more money. The government would pay the difference. Subsidy spending, however, would explode and probably would exceed the amount of support China is allowed to give farmers under its WTO commitments.

Wednesday, January 9, 2013

Chinese dairy companies have been shifting their product mix to from their traditionally dominant ultra-high temperature milk products to pasteurized milk as a strategy for regaining consumer confidence.

Pasteurized milk was the featured topic of discussion at a meeting of Chinese dairy company leaders held in Chengdu in December 2012. The Chinese industry early on adopted ultra-high temperature (UHT) technology for sanitizing milk. UHT allows the milk to be stored at room temperature without spoiling, a valuable feature in a market where refrigeration is often unavailable, unreliable or costly. UHT allowed milk production to be diffused in far-flung areas like Inner Mongolia and Heilongjiang, and ship it hundreds of miles to consumer markets.

The melamine incident and other food safety problems have created a consumer confidence crisis in the Chinese dairy industry and companies are looking for ways to restore confidence in their products. Shifting away from UHT to fresh pasteurized milk is a strategy pursued by many Chinese companies. Pasteurized milk production is reportedly growing 35 percent faster than UHT milk. Many companies reportedly are closing down their UHT production lines.

One participant in the meeting suggested that consumer alienation is created by the lack of transparency in milk production, processing and marketing. Companies think shortening the time it takes for milk to travel from the cow to the consumer will help restore confidence in the product's safety and quality. This is probably related to the tendency of Chinese consumers to equate "freshness" with "safety." In surveys, consumers often identify the "sell-by" date or shelf time as one of the most important indicators of milk safety.

The article describing the meeting is vague in its explanation of what pasteurized milk is and its advantage. The alternative to pasteurized milk is only identified as "room temperature" milk and UHT is never mentioned or explained. A company official asked to explain the difference is himself vague. His explanation of pasteurized milk was that "It's the same as the difference between fresh fruit and canned fruit."

An official from the New Hope Company's dairy subsidiary explained their strategy is to build "modern countryside farms" near major cities. They plan to set up 10,000-cow networks of farms in dairy villages within 100 km of a processing plant so milk can get from the milking parlor to the processor within 2 to 5 hours.

How many farmers in a 100-km radius of Beijing, Shanghai or Guangzhou are willing to raise dairy cows? Will they be willing to bring them into a centralized milking parlor twice a day and then take them home? The poor farmers in remote grasslands and mountainsides eager to raise cows would be excluded from such a system.

Once again there seems to be a disjunct between marketing-focused dairy companies and the realities of producing and marketing milk.

Well, not exactly. A pair of December 2012 news articles on illegal butcher raids in the city of Rui'an in southern Zhejiang Province suggest a "Keystone Kops" approach to food safety enforcement in China. Another story from Hunan Province reports that a veterinarian acted as a broker for dead pig butchers.

Midnight Raids "Educate" Perps

After midnight on December 11, over 100 enforcement personnel from the city's food safety office and its commerce, agriculture and forestry, public security, food and drug monitoring, technical supervision, and environmental protection bureaus were mobilized to raid illegal butcher "dens" in districts outside the city.

Rui'an City consumes about 1500 pigs daily. Most of them come from the legally-designated slaughterhouse, but some are slaughtered illegally by private butchers. Authorities began a publicity program to stamp out illegal butchering in July 2012. They organized the December raids after getting tips that illegal butchers were operating in several districts. The enforcement team was described as "education-oriented, people-oriented, using force as a supplement." In other words, they just warned the people they caught. The enforcers were apparently surprised to find butchers who promised to change their ways went back to butchering the next day.

One team went to Wulin village where they found the door to the alleged butcher den closed and no lights on. As the team was about to give up and move on, they spied a guy on a tricycle cart carrying what appeared to be a pig. The frightened tricycle driver jumped off his bike and tried to get away, but the team leader yelled, "Grab him quick, don't let him get away!"

With a look of panic, the tricycle driver exclaimed, "I didn't mean it, I'm willing to be educated!"

The perpetrator was a farmer from the neighborhood who has a dozen pigs in his backyard and had just killed one that he planned to sell in the local market. After receiving a lecture and promising to take all his pigs to the legal slaughterhouse, the man was sent on his way. There was no report of what happened to the pig.

The team then went to another alleged butcher den where they again found the door closed and no lights on. This time the team noticed white smoke billowing from the opposite side of the building. They called in to the building but received no response. They barged in through the door and found a single butcher. When asked why he didn't respond to their demand to open the door, the man replied that he had been playing with his cell phone and didn't hear them.

This butcher den was in a ramshackle building with two pens containing ten live pigs and a steaming vat for removing pig bristles. Nearby there was an old refrigerator containing a butchered hog that gave off a strong odor.

The enforcement team told the butcher, “We won’t take away the pigs this time, but starting tomorrow you must take pigs to the designated slaughterhouse. Otherwise we’ll confiscate them.”

A farmer delivering a pig to this butcher den was also warned. The farmer agreed to lead the team to two other butcher dens.

The next butcher den was hidden away in an alley in a residential neighborhood. They found four people butchering hogs there. Another butcher den was in a disused grain warehouse, also in a winding lane that was hard to find. It was cluttered, the ground was covered in blood, waste water, and pig organs, and butchered pigs were stored on shelves. There were two pens containing 20 pigs.

A man named Du explained that he had been running late and couldn't get the pigs to the legal slaughterhouse on time. He didn't know whom to contact at the slaughterhouse. The enforcement team "educated" him and made him promise to take his pigs to the legal slaugtherhouse from now on. They let him keep the pigs.

By the morning their car was filled with 12 live pigs, one dead pig, and some tools they had seized in their raids of seven butcher dens that night. Reportedly, there were a dozen illegal butchers who made arrangements to bring pigs to the legal slaugtherhouse the next day.

Butchers Were Still in Business

The enforcement team gave out phone numbers for citizens to report illegal butcher dens. The following week, authorities received calls reporting that quite a few illegal butcher dens were still operating, despite the enforcement team's midnight educational work.

Some of the butchers, afraid of getting caught in midnight raids, had started doing their butchering during the day. At one den in a bamboo shack, one of the raiders exclaimed, "Wow, didn't we destroy this vat last time we were here?"

The team leader explained, "Last time we raided, we warned this guy and he promised not to slaughter any more hogs. This time we'll have to destroy his tools."

"We simply can't let this go on," he said.

Another butcher den had been reported three times by residents, but the team had been unable to find it until they got detailed instructions from one citizen by phone. A neighbor complained that the place stinks and the squealing from the pigs keeps them up at night. He's frustrated that it has been reported many times but no one has done anything about it.

In this den there were no live pigs but fresh skins were stacked in the corner. They destroyed the vat with a sledgehammer.

The last butcher den raided was a nasty room with spiderwebs, blood and urine on the floor, and dead pigs lying on benches.

A lady there insisted she hadn't slaughtered any pigs since the last time they raided. She said she was processing pig blood she bought from a legal slaughterhouse. The team leader told her she wasn't allowed to process anything from a pig. He called the slaughterhouse and warned them, "If we hear about this happening again, we'll come and check up on you too."

The veterinary officer was accused of selling over 30 dead pigs since 2008. The pigs had symptoms that included foaming at the mouth, diarrhea, and fever.

One of China's strategies for dissuading the sale of dead pigs is to provide subsidized insurance. In this case, the farmers took the insurance money and the money from butchers. The veterinarian assessed the cause of death and made claims to the insurance company to get indemnities of 700-1000 yuan. The farmers knew the pigs should be burned or buried, however to reduce losses, they wanted to sell to buyers who were introduced by the veterinarian.

The veterinary director was arrested along with three butchers last July and accused of "creating panic" among other things. This week he was sentenced to 6 months in prison. Authorities say they spent ten years investigating the illegal sale of pork in this district.

Last July, a local resident posted online, "Probably everyone in our area has eaten this kind of pork, causing us to worry about our health. Now no one will eat pork again."

Dead Pigs Discovered in Shenyang

A pile of dead piglets was discovered by the road outside a residential community in Shengyang, Liaoning Province in early December. No one knew how they got there, but it made local residents worry that pork from dead pigs was being sold in their neighborhood, posing a food safety or disease threat.

It Happens in Taiwan Too

Chinese news media were probably pleased to report that sale of sick and dead pigs happens in Taiwan too. Taiwan media reported police found over 4000 kg of sick and dead pork in a meat locker in southern Taiwan. The suspects had been selling pork from dead pigs to hot pot, barbecue and all-you-can-eat restaurants for about half a year. They had been caught doing it five years earlier and resumed the business last year.

Thursday, January 3, 2013

Another article complaining about China's increasing reliance on imported soybeans blames the twin bogeymen of genetically modified seeds and foreign subsidies. These two culprits are often trotted out in articles like this, but this one claims that subsidies and genetically modified seeds are two sides of the same coin. This article reveals the misperceptions and twisted reasoning that are common in China and sometimes generate conflict when they influence trade barriers and antidumping investigations.

The article begins with a visit to Heilongjiang Province's Mingshui county where the local agricultural officials say soybean plantings this year were one-tenth of their peak of 400,000 mu. A local farmer explains why he planted less than usual. Corn yields are 650-700 kg per mu and soybeans only yield 130-150 kg per mu. The price of soybeans is a little over twice the price of corn, not enough to make up for the difference in yield.

The vice secretary of the provincial soybean industry association reports that plantings in Heilongjiang have declined from 64 million mu in 2010 to an estimated 40 million mu in 2012. The vice secretary of the national association estimates that soybean production was 10 million metric tons in 2012, just 15 percent of the soybeans consumed in China. He says imported soybeans are estimated to reach 60 million metric tons in 2012. Academics interviewed say that China would need to expand its agricultural land base by 20 percent in order to produce all those imported soybeans at home.

The soybean association official reminds readers that virtually all of the imported soybeans are genetically modified (GM).

A Ministry of Agriculture researcher reports the advantage of these GM soybeans: their oil content is 2-to-5 percentage points higher and the high protein soy meal produced from them brings a good price. Their appearance and uniformity is better and their unit cost is lower because they are planted on large scale farms.

The soybean industry association official, however, claims U.S. government subsidies are the source of the Chinese industry's problems. Like many observers in China, this official vastly overstates the role of subsidies. He claims that the United States includes soybeans in a national development strategy, using subsidies to support soybean production. He then claims that government subsidies and "trust funds" lower the price of GM soybeans to expand their sales.

As evidence of the "price distortion", he points out that organic food--which prohibits GM ingredients--is much more expensive than conventional food which can include genetically modified ingredients. Therefore, since GM food is cheaper than organic food, it must be subsidized, concludes the Chinese soybean industry official.

By the same reasoning, Ford automobiles must be subsidized since they are cheaper than Mercedes.

Over 60 percent of China's soybean imports come from Brazil and Argentina--do U.S. subsidies explain why South American beans are cheaper than Chinese soybeans? Yes, says the Chinese official. He claims that the U.S. government gives subsidies to multinational grain trading companies to buy land in South America to produce genetically modified soybeans.

An official from an international relations research institute complains that big seed companies like Monsanto and Dupont get large royalty payments on their GM seeds which motivates not only the seed companies but also multinational grain traders to promote the GM seeds around the world. This seems to contradict the soybean industry official's argument that prices are artificially low.

The researcher claims that GM soybeans dominate markets in Brazil, Argentina, and China because foreign companies exert complete control of the entire chain from breeding, to farming, processing, retail and branding.

The soybean industry official suggests that China should study how Europe and Japan controlled agricultural commodity imports in a way that averted threats to their domestic production. He says China should emphasize the advantage of its non-GM soybeans. He says food-grade soybeans used for tofu, soy milk, and other food products have a price 40-to-50 percent higher than soybeans used for processing into cooking oil. Another official says the demand for soy-based food products is flourishing, rising 20 percent annually in Beijing.

The article featured an interview with the head of the largest soybean processor in China--Yihai Kerry, a subsidiary of the Singapore company Wilmar. The interview began by discussing the necessity of continuing to expand into new products and innovate in the highly competitive soybean processing industry.

The article then noted the irony of the steady decline in Chinese soybean production in recent years despite the government's attempt to support domestic soybean prices.

According to people in the industry, processors in China don't want to buy domestic soybeans because the price support is higher than the price of imported soybeans. Consequently, many of the China-produced soybeans go into government warehouses instead of into the market. The gap is filled by imported soybeans. The increased demand for imported beans raises the price for farmers in the United States and South America who produce them.

Meanwhile, Chinese soybean production continues to decline and Chinese soybean crushers located in inland provinces shut down or move to coastal locations to get access to cheaper imported beans.

China's imports of soybeans totaled about 41 million metric tons (mmt) during 2008-09, the year the price support was introduced. Since then imports have soared to an estimated 63 mmt during the current market year. By comparison, China produces about 14-to-15 mmt of soybeans domestically, and just 4-to-5 mmt are processed into vegetable oil. The rest are used to make tofu and other food products or stored in government warehouses.

The ironic result--according to the author of the article--is that the price support intended to help Chinese soybean producers actually benefits farmers overseas.

According to the article, people in the industry recommend that China adopt a deficiency payment form of subsidy in which the government would pay producers the difference between the market price and a government-set target price based on production costs.

Wednesday, January 2, 2013

The December 2012 scandal about drug use in "quick chickens" was a reminder that Chinese consumers are unable to trust the supply chain that delivers their meat. The news media recently carried several reports about direct arrangements in which consumers commission farmers to raise a pig using traditional "backyard" methods that raise pigs at a much slower rate than common commercial methods.

In a story from Sichuan Province, Mr. Yang made the 70-kilometer trek to collect the meat from a pig he commissioned a farmer to raise for him using only grains. The pig grew to just over 50 kg in nine months. The farmer raised another group of pigs from the same litter to the usual slaughter weight of 100 kg in three-and-a-half months using commercial feed.

The farmer said these "grain pigs" require 5 kg of feed per kilogram of weight gain, more than the usual 3:1 ratio. He said the production cost is two-thirds higher than that of pigs on commercial feed. Mr. Yang spent 40 yuan per kg for the pork, plus 100 yuan for gas to get to the farm. The farmer said he still didn't make money on the "grain pig" and certainly wouldn't raise pigs in this manner unless he had a special order for them. From one litter of piglets the farmer raised three as "grain pigs" for Chengdu residents and seven using commercial feed.

A "new year" pig on order awaits his fate in the Liaoning countryside.

Another article describes a pair of migrant workers who returned to their village in Chongqing to set up a business venture producing "grain pigs" on a much larger scale. (Articles on returned migrants setting up pig farms appear regularly as part of a government campaign to encourage migrants to return to their villages to set up businesses.)

Mr. Huang, 30 years old, worked as a taxi driver in Dongguan and invested 1.2 million yuan in the farm. Huang is in charge of management and sales while his partner, Mr. Zeng is a veterinarian with the technical know-how. Their farm covers 28 mu (about 4-and-a-half acres) and has separate areas designated for breeding animals, sows, piglets, and fattening hogs. Normally the farm has 12 employees.

The farm rented a couple of acres to grow alfalfa as feed for the pigs. He estimates that each mu (one-sixth of an acre) can produce 20,000 kg of fodder which grows back in 15 days. Huang's "grain pigs" consume 4 kg of fodder and 3.5 kg of grain daily. With over 1300 piglets, the farm has to spend 5000 yuan per day, putting them under a lot of pressure.

Mr. Huang plans to apply for a government-sponsored microenterprise loan of 150,000 yuan to set up a record-keeping system. According to his plan, each pig will have a certificate recording its pedigree, immunizations, feed, slaughter and transportation so consumers can be assured of the pork's provenance and safety.

They have plans to set up a slaughter and processing facility and to organize a cooperative to involve local farmers in the venture. Eventually they hope to increase production to 10,000 head annually, sign long-term marketing contracts with supermarkets and restaurants, and register their own "grain pig" brand (all of these are strategies pushed by the government).

Mr. Huang said their first batch of 500 pigs slaughtered in 2011 and made a tidy profit equal to a couple thousand dollars. During 2012 the price went down and the profit on 1000 pigs slaughtered was less than the previous year. Mr. Huang studied up on business practices and expressed the constant worry about risks due to market fluctuations.

An article about "new year pigs" in Dalian says these are not "quick pigs" (a reference to the recent poultry drug incident), but highlights the difficulty of establishing a market for these pigs. Some city residents order a pig for the new year in May and will come to collect it in January. The reporter says that this year food safety concerns have prompted a commercial exchange in Dalian and production areas to set up record-keeping systems that give consumers assurance about the safety of the pigs they order.

According to the article, quite a few Dalian citizens would like to go to the countryside to get a pig, but they have no marketing channel. There are some food shop networks and buying clubs that act as intermediaries and a few farmers in remote areas with good environmental conditions are contracting directly with city people to raise a pig for them. These buying clubs have about 200 members each. Four to six people can go in together to buy a pig.

The article says most "grain pigs" in Liaoning are raised by elderly people, usually 3 or fewer in one farmyard. Most pigs raised in this manner are eaten by farm families themselves when their children come home for new year or they are sold to neighbors in the countryside.

Like other products, there are problems with fakes. There have been some instances where farmers bought common pigs and resold them as "grain pigs."

This phenomenon of selling pigs directly to urban residents combines tradition--"backyard" pig-raising and new year traditions--with the lack of trust that characterizes China's new 21st century urban society. It is similar to other budding attempts to eliminate middlemen--garden plots and a community-supported agriculture movement imported from Japan and the U.S., a campaign to encourage supermarket chains to buy directly from farmer cooperatives, and food shops and sales counters that offer food purported to be supplied directly by farmer cooperatives. These explorations reveal the anxiety many Chinese urban residents have about their food and the difficulty of establishing mechanisms for building trust in food supply chains in a newly-urbanized society.